TaxTMI 
TaxTMI 
2023 (1) TMI 1528
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....r determination of the Arm's Length Price (ALP) of the international transactions entered by the assessee with its Associated Enterprises (AEs). The TPO vide order dated 30.07.2021 passed u/s 92CA of the I.T. Act, proposed TP adjustment of Rs. 47,36,21,814 with regard to the international transactions of the assessee with its AEs in respect of Advertising, Marketing and Promotion (AMP) segments. On receipt of the TPO's order, the A.O. passed draft assessment order u/s 143(3) r.w.s. 144C of the I.T. Act (order dated 25.09.2021) by incorporating the above TP adjustment proposed by the TPO and also making certain corporate tax additions / disallowances. 3. Aggrieved by the draft assessment order, the assessee preferred objections before the Dispute Resolution Panel (DRP). The DRP vide its directions dated 27.06.2022, disposed of the objections filed by the assessee. Pursuant to the DRP's directions, the impugned final assessment order was passed on 28.07.2022. In the final assessment order the following adjustments were made :- Particulars Amount (Rs.) Advertising Marketing and Promotion (AMP) expenses 47,36,21,814 Corporate Tax Adjustment ....
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....enditure amounting to INR 52,68,42,143 incurred by the Appellant on selling and marketing of its products, INR 42,40,61,752 is purely in the nature of selling expenses. 2.8. The learned FAO/ TPO / DRP has erred, in law and in fact by applying the Bright line test ("BLT") approach to determine excessive AMP or non-routine expenditure which is not in accordance with provisions of the Income Tax Act, 1961. 2.9. The learned FAO / TPO / DRP has erred, in law and in fact by not following the decision rendered by the Hon'ble Bangalore ITAT in the Appellant's own case, for following AYs a) AY 2009-10 reported at IT(TP)A No. 29/Bang/2014 b) AY 2010-11 reported at IT(TP)A No. 227/Bang/2015 c) AY 2011-12 reported at IT(TP)A No. 542(B)/2016 and IT(TP)A No.551(B)/2016 d) AY 2012-13 reported at IT(TP)A No. 358(B)/2017 e) AY 2013-14 reported at IT(TP)A No. 2905(B)/2017 f) AY 2014-15 reported at IT(TP)A No. 3328(B)/2018 g) AY 2016-17 reported at IT(TP)A No. 219/Bang/2021 2.10. Without prejudice to the above grounds, the learned FAO / TPO / DRP erred in law and fact, by considering 'Other method....
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....enses.) Disallowance under section 14A of the Act amounting to INR 2,83,34,332 3.5. The learned FAO/DRP, has erred, in law and on facts, in making additional disallowance of INR 2,83,34,332 under section 14A of the Act by applying Rule 80 of the Rules. 3.6. The learned FAO /DRP, has erred, in law and on facts, in not appreciating the fact that the disallowance under section 14A of the Act is restricted to only those investments which have generated exempt income during the year. 3.7. The learned FAO / DRP, has erred, in law and on facts, in disallowing expenditure under section 14A of the Act by applying Rule 80 of the Rules without appreciating the fact that that the explanation inserted in the provisions of section 14A of the Act by the. Finance Act, 2022 is prospective and not retrospective. 3.8. The learned FAO/DRP, has erred, in law and on facts, in disallowing expenditure under section 14A of the Act by applying Rule 80 of the Rules without considering the prevailing judicial precedents. Disallowance of expenditure of INR 1,94,54,100 claimed under the head 'any other amount of allowable deduction 3.9. The lear....
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.... FY 2017- 2018 Consumer 1. Advertisement in TV and Radio 10,27,80,391 2. Awareness 3. Print Media 4. Brand ambassador Sub Total 10,27,80,391 Trade 5. Co-op Advertising 7,00,04,100 6. Research, training and other promotions 80,32,350 7. Loyalty program 13,57,83,693 8. Merchandising at optician outlets 3,83,89,280 9. Freight and others 18,16,458 10. Samples and demo sets 5,99,82,351 11. Sales conference and exhibition 3,11,15,672 12. Project expenditure - NVG 43,68,915 13. Others 7,45,68,933 Sub Total 42,40,61,752 Total 52,68,42,143 7. The TPO held that the assessee should be compensated along with a mark-up. The TPO estimated the routine selling, marketing and the distribution expenses by considering unrelated parties (companies considered as comparable by the assessee for benchmarking its distribution segment) and arrived at an estimated routine AMP expenses of 2.27% of sales. Accordingly, the TPO computed excess expenditure for value of added functions under the AMP activities in India in favour ....
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....ght to our notice by the ld. counsel for the assessee is the decision of the ITAT in assessee's own case for assessment year 2009-10 and 2010- 11 on the same issue of AMP expenses. The Tribunal took the following view after extracting the decision of the Hon'ble Delhi High Court in the case of M/s Maruti Suzuki India Ltd. (supra). "21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee - company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also ensure to its foreign AE is not sufficient to infer existence of international trans action. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee-company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand valu....
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.... advertisement. Secondly the TPO's case is that the AMP expenses promoted the brand name of Essilor International a different entity and not M/S.Chemiglas Corpn.Ltd., Korea. Therefore, the contention of the TPO that the assessee has promoted the brand of Chemiglas is not correct in law. There is no finding by the learned TPO that the assessee has promoted the brand name belonging to Chemiglas Corporation. 2. Without prejudice, it was submitted that the interpretation placed by the learned TPO on clause 3.5 of the Distributorship Agreement was erroneous. Clause 3.5 states that the Distributor agrees to use its best efforts to promote the sale of the products in the territory in accordance with the Supplier's policy and shall protect the Supplier's interest with diligence of a responsible business man. It was submitted that such clauses are normal clause entered into between Distributor and Supplier of products. Any purpose of distribution is to increase the sale of the products of the supplier and merely stating this in the agreement would not mean that the Distributor is under an obligation to promote a brand. Clause 3.5 does not even create an obligation on th....
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...., the ultimate determination should be based on the factual substance and the actual transactions. It was submitted that when the assessee has not entered into any written agreement with Essilor International for brand promotion, the question of variance between the contractual terms and the conduct of the parties does not arise at all. There is no finding by the learned TPO that the assessee has entered into any written contract or other arrangement whereby it is agreed to incur AMP activities to promote the brand name of Essilor International. The learned TPO has simply presumed the existence of international transaction just because the AMP expenses incurred by the assessee are more than the AMP expenses incurred by the comparable entities. This has been held to be impermissible by the Hon'ble Delhi High Court in Maruthi Suzuki's case and Hon'ble ITAT in assessee's own case. 5. With regard to the action of the TPO in drawing inference from legal proceedings instituted in India by the foreign AE for protecting its trade mark, it was submitted that M/s. Essilor International was the owner of the brand and was a party to the proceedings and the Assessee as ....
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....acturer incurring AMP expenses it was held that it incurring of AMP expenses would be an international transaction and the issue of determination of ALP was remanded. This decision was however overruled in Maruti Suzuki India Ltd. v. Addl. CIT [2011] 335 ITR 121 (SC) wherein the Hon'ble Supreme Court left the question whether AMP expenses gives raise to international transaction or not open with the following observations: "In this case, the High Court has remitted the matter to the Transfer Pricing Officer ("the TPO" for short) with liberty to issue fresh show-cause notice. The High Court has further directed the Transfer Pricing Officer to decide the matter in accordance with law. Further, on going through the impugned judgment of the High Court dated July 1, 2010, we find that the High Court has not merely set aside the original show cause notice but it has made certain observations on the merits of the case and has given directions to the Transfer Pricing Officer, which virtually conclude the matter. In the circumstances, on that limited issue, we hereby direct the Transfer Pricing Officer, who, in the meantime, has already issued a show cause notice on September 1....
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....Court held as follows: " .... when the licence agreements were originally entered into in 1982, MSIL was known as MUL and SMC did not hold a single share in MUL. In 2003 SMC acquired the controlling interest in MSIL. There were various models of Suzuki motor cars manufactured by MSIL and each model was covered by a separate licence agreement. Under these agreements, granted licence to MSIL to manufacture that particular car model and provided technical know-how and information and right to use Suzuki's patents and technical information. It also gave MSIL the right to use Suzuki's trade mark and logo on the product. Pursuant to this agreement, MSIL was using the co-brand, i.e., Maruti Suzuki trade mark and logo for more than 30 years. This co-brand could not be used by SMC and was not owned by it. The clauses in the agreement between MSIL and SMC indicated that permission was granted by SMC to MSIL to use the co- brand "Maruti Suzuki" name and logo. The mere fact that the cars manufactured by MSIL bore the symbol "S" was not decisive as the advertisements were of a particular model of the car with the logo "Maruti- Suzuki". The Revenue had been unable to contradict ....
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....s, there could not be a presumption that the assessee was a subsidiary of the foreign company and that all the activities of the assessee were in fact dictated by the foreign company. Merely because the foreign company had a financial interest, it could not be presumed that advertising, marketing and sales promotion expenses incurred by the assessee were at the instance or on behalf of the foreign company. The initial onus was on the Revenue to demonstrate through some tangible material that the two parties acted in concert and further that there was an agreement to enter into an international transaction concerning advertising, marketing and sales pro-motion expenses." 19. In the light of the law as it exists today, we shall examine the arguments of the rival parties. There has been no agreement between Essilor International which owns the various brands set out by the TPO in his order and the Assessee to incur any Advertisement and Marketing or Sales promotion expenses. None of the other reasons given by the TPO which have been explained by the Assessee and set out in the earlier paragraph can be the basis to hold that there was in fact an international transaction in th....
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....19. According to the A.O., annual average of monthly average investment was Rs. 538,09,33,225 and 1% of the said amount is disallowed under Rule 8D. Therefore, he disallowed a further amount of Rs. 2,83,34,332 (5,38,09,332 - 2,54,75,000) 17. The DRP vide its directions dated 29.06.2022 upheld the disallowance u/s 14A of the I.T. Act on the entire investment by stating that whether the exempt income has materialized or not is irrelevant factor for invoking the provisions of sections 14A of the I.T. Act. Further, the DRP by placing reliance on the Explanation to section 14A inserted by the Finance Act, 2022 concluded that the provisions of section 14A of the I.T. Act shall always be deemed to have been applicable even in a case where there is no exempt income has been received by the assessee during the year (refer directions of the DRP at para 2.2.4 to 2.2.7). 18. Aggrieved, the assessee has raised this issue before the Tribunal. The learned AR submitted that the A.O. has erred in making additional disallowance of Rs. 2,83,34,332. The learned AR submitted that the disallowance u/s 14A of the I.T. Act is to be restricted only those investments which have generated exempt income....
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.... Ltd. (supra) has specifically held that even if there is no exempt income, the provisions of section 14A are applicable in view of the decision of Hon'ble Supreme Court in the case of Rajendra Prasad Moody (supra). His submission is that the decision of Hon'ble Delhi Court reversing the decision of Special Bench in Cheminvest should not be followed because that is contrary to the principles laid down in Rajendra Prasad Moody's case (supra). 11.3 It is against these submissions, we first refer to the facts as were obtaining in these two decisions. 11.4 In the case of Cheminvest Ltd. (supra), the assessee had borrowed funds of Rs. 8,51,65,000/- and during the previous year relevant to assessment year 2004-05 paid interest of Rs. 1,21,02,367/- thereon. Out of this unsecured loan, the assessee invested a sum in purchase of shares, which was shown as investment for the purpose of long term capital gains. The AO disallowed interest proportionate to the investment in shares, though no exempt income was earned during the year. The CIT(A) affirmed this but held that the net interest debited to the P&L A/c was required to be apportioned and not the interest exp....
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....o qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of section 57(iii) to suggest that the purpose, for which the expenditure is made, should fructify into any benefit by way of return in the shape of income. 11.7 Thus, in both the decisions viz. in the case of Cheminvest Ltd. (supra), and in the case of Rajendra Prasad Moody (supra), the issue related to allowability of expenditure which had direct nexus with the earning of income. The borrowing in both the cases has not been disputed being for acquiring shares. Hon'ble Delhi High Court has specifically held in para 21 as under :- "21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moddy (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is for the purpose of making or earning such income'. Section 14A of the Act on the other hand contains the expression 'in relation to income which does not form part of the total income.' The decision in Rajendr....
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....d 18.12.2002 and 20.12.2012. It was observed that in fact, the respondent-assessee was not to undertake any manufacturing activity themselves. After considering the FIPS approval and the purchase of shares in the said company of Rs. 1850.91 crores, ld. CIT(A), inter alia, observed that the assessee was engaged in the business of holding of investment and was entitled to claim expenditure provided. There was a direct connection between expenditure incurred and business of the assessee company. However, he pointed out that since the business of the respondent-assessee was to act as a holding company for downstream investment and as it was an accepted fact that they had incurred expenses to protect their business and explore new avenues of investment, the provisions of section 14A were applicable. 11.11 The Hon'ble High Court observed that the reasoning given by the CIT(A) was ambiguous and unclear and on clarity being sought from the Revenue it was pointed out that "the stand of the assessee contained a contradiction to the extent that on the issue of setting up of business, it was stated that the assessee had incurred expenditure on acquiring the shares, therefore, the ....
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.... :- "As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the C1T(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs. 2,03,752/- made by the Assessing Officer was in order" 15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether Income earned in a subsequent year would or would not be taxable, ....
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....of "whose decision is binding on whom", the. Hon'ble Bombay Court considered in detail the hierarchy of the courts and has observed as under: "It is also well-settled that though there is no specific provision making the law declared by the High Court binding on subordinate courts, it is implicit in the power of supervision conferred on a superior Tribunal that the Tribunals subject to its supervision would conform to the law laid down by it. It is in that view of the matter that the Supreme Court in East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC 1893 (at page1905) declared: "We, therefore', hold that the law declared by the highest court in the State is binding on authorities or Tribunals under its superintendence, and they cannot ignore it. .... " This position has been summed up by the Supreme Court in Mahadeolal Kanodia v. Administrator General of West Bengal AIR 1960 SC 936 (at page 941) as follows: "Judicial decorum no less than legal propriety forms the basis of judicial procedure. If one thing is more necessary in law than any other thing, it is the quality of certainty. That quality would totally disappear if ....
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....r passed consequent upon an appeal or revision of the original assessment, this view had not been accepted by the Bombay High Court, the Allahabad High Court and the Kerala High Court. Respondent No.1, accordingly, chose to accept the view of the Bombay, Allahabad and Kerala High Courts in preference to the view of the Calcutta High Court. In my view, the order of respondent No. 1 cannot be sustained on the simple ground that respondent No. 1 is an authority operating within the State of West Bengal and is bound by the decisions of the High Court of this State (see CIT v. Indian Press Exchange Ltd. [1989] 176 ITR 331 (Cal) ; East India Commercial Co. Ltd. v. Collector of Customs AIR 1962 SC 1993, paragraph 29). In that view of the matter, the impugned order must be set aside and the Commissioner is directed to consider the matter afresh in keeping with the decisions of this court after giving the petitioners an opportunity of being heard. At least 48 hours clear notice must be given to the petitioners. The Commissioner will communicate the final order to the petitioner within eight weeks from the date of hearing. (iv) CIT v. J.K. Jain [1998] 230 ITR 839 (....
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....d. (supra). The relevant portion of the Hon'ble Delhi High Court, reads as follows :- "5. However a perusal of the Memorandum of the Finance Bill, 2022 reveals that it explicitly stipulates that the amendment made to section 14A will take effect from 1st April, 2022 and will apply in relation to the assessment year 2022-23 and subsequent assessment years. The relevant extract of Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 are reproduced hereinbelow: "4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. 5. This amendment will take effect from 1st April, 2022. 6. It is also proposed to amend sub-section (1) of th....
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....tate of the law, on 27-2-1999 the Finance Bill, 1999 substituted the Explanation to Section 9(1)(ii) (or what has been referred to by us as the 1999 Explanation). Section 5 of the Bill expressly stated that with effect from 1-4-2000, the substituted Explanation would read: "Explanation .- For the removal of doubts, it is hereby declared that the income of the nature referred to in this clause payable for- (a) service rendered in India; and (b) the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment, shall be regarded as income earned in India." The Finance Act, 1999 which followed the Bill incorporated the substituted Explanation to Section 9(1)(ii) without any change. 13. The Explanation as introduced in 1983 was construed by the Kerala High Court in CIT v. S.R. Patton [(1992) 193 ITR 49 (Ker)] while following the Gujarat High Court's decision in S.G. Pgnatale [(1980) 124 ITR 391 (Guj.)] to hold that the Explanation was not declaratory but widened the scope of Section 9(1)(ii). It was further held that even if it were assumed to be clarificato....
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....es Ltd. v. CIT [(1980) 1 SCC 139 : 1980 SCC (Tax) 67].) An Explanation to a statutory provision may fulfil the purpose of clearing up an ambiguity in the main provision or an Explanation can add to and widen the scope of the main section [See Sonia Bhatia v. State of UP., (1981) 2 SCC 585, 598 : AIR 1981 SC 1274, 1282 para 24]. If it is in its nature clarificatory then the Explanation must be read into the main provision with effect from the time that the main provision came into force [See Shyam Sunder v. Ram Kumar, (2001) 8 SCC 24 (para 44); Brij Mohan Das Laxman Das v. CIT, (1997) 1 SCC 352, 354; CIT v. Podar Cement (P.) Ltd., (1997) 5 SCC 482, 506]. But if it changes the law it is not presumed to be retrospective, irrespective of the fact that the phrases used are "it is declared" or "for the removal of doubts".' (emphasis supplied) 7. The aforesaid proposition of law has been reiterated by the Supreme Court in M.M. Aqua Technologies Ltd. v. CIT [2021] 129 taxmann.com 145/282 Taxman 281/436 ITR 582. The relevant portion of the said judgment is reproduced hereinbelow :- "22. Second, a retrospective provision in a tax act which is "for the removal o....
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....even where such language is used, if it alters or changes the law as it earlier stood. 22. Therefore, following the judgment of the Hon'ble Delhi High Court in the case of PCIT v. Era Infrastructure India Ltd. (supra) and the Special Bench order of the Delhi Tribunal in the case of ACIT v. Vireet Investment (P.) Ltd. (supra), we hold that the disallowance u/s 14A of the I.T. Act is to be restricted to only those investments which have generated exempt income during the relevant assessment year. It is ordered accordingly. 23. In the result, grounds 3.5 to 3.8 are allowed. Ground 3.9 to 3.11 (Disallowance of expenditure of Rs.1,94,54,100 (Corporate Tax Issue) 24. The brief facts of the case are as follows: The learned AR submitted that the assessee had created a provision on account of obsolete / bad stock amounting to Rs. 8,78,53,132. However, the assessee had voluntarily disallowed the provision for inventory amounting to Rs. 8,78,53,132. In this regard, the learned AR drew our attention to the Income-tax computation statement for assessment year 2015-2016 at page 1798 of the paper book Vol. II submitted by the assessee. It is submitted that subsequently out of t....